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The
President’s
Report to the
Board of
Directors
February 3, 2011
CURRENT ECONOMIC DEVELOPMENTS - February 3, 2011
Data since your last Directors' meeting show the economy accelerated in the fourth
quarter, and is likely to continue to grow at a solid pace through the first half of this
year. While the recovery appears to have become more self-sustaining, downside
risks remain in the forms of housing and employment. Further improvements in
these areas will be necessary before declaring a healthy economy.
The increase in real GDP in the fourth quarter primarily reflected positive
contributions from personal consumption expenditures, net exports and
nonresidential fixed investment that were partly offset by a negative contribution
from private inventory investment.
In January, initial claims were up from December, but down a bit from their fourth
quarter average. Consumer attitudes picked up in January due to better feelings
about current business and employment conditions, while also being more optimistic
about future improvements.
Inflation worries remain minimal as price increases in the fourth quarter were
relatively small, especially for the core measures. Unit labor costs decreased in the
fourth quarter while total compensation, as measured by the ECI, picked up slightly.
Oil prices rose a bit in January and closed the month at over $92 per barrel.
The acceleration in real GDP growth in the fourth quarter primarily reflected a sharp
downturn in imports, an acceleration in PCE, and an upturn in residential investment.
Those effects were partly offset by downturns in private inventory investment and
government spending and a deceleration in nonresidential investment.
Annualized Percent Change
Real Gross Domestic Product
Annualized Percent Change
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
-4.0
-4.0
-6.0
-6.0
-8.0
-8.0
07:Q4
08:Q2
08:Q4
Source: Bureau of Economic Analysis / Haver Analytics.
09:Q2
09:Q4
10:Q2
10:Q4
Consumption surged in the fourth quarter, posting its biggest increase in nearly five
years. Consumption has been a key contributor to the recovery, aided by incomes
that rose steadily throughout 2010.
Personal Income
Real Consumption
Annualized Percent Change
Annualized Percent Change
6.0
12.0
9.0
Personal Income
4.0
6.0
2.0
3.0
0.0
0.0
-3.0
-2.0
-6.0
Real Disposable
Income
-9.0
-4.0
-12.0
-6.0
07:Q4
08:Q4
08:Q2
09:Q4
09:Q2
10:Q4
07:Q4
08:Q4
08:Q2
10:Q2
09:Q4
09:Q2
10:Q4
10:Q2
Source: Bureau of Economic Analysis / Haver Analytics.
Auto sales rose further in January after rising steadily through 2010. The annual
sales pace in January was higher than any single-month pace seen last year.
Total Auto and Light Truck Sales
Millions of Units, Annualized
Millions of Units, Annualized
20.0
Nov
Dec
Jan
18.0
12.2
12.5
12.6
16.0
14.0
12.0
10.0
8.0
6.0
4.0
07:Q4
07:Q4
08:Q2
08:Q2
08:Q4
08:Q4
09:Q2
09:Q2
Source: Bureau of Economic Analysis / Haver Analytics.
09:Q4
09:Q4
10:Q2
10:Q2
10:Q4
10:Q4
Jan-11
Growth in business investment slowed further in the fourth quarter, due primarily to
a deceleration in equipment and software investment. While still being a positive
contributor to GDP, business investment is not providing as much support as it was
earlier in the recovery.
Business Investment
Annualized Percent Change
Annualized Percent Change
30.0
3.0
Business
Investment
20.0
2.0
10.0
1.0
0.0
0.0
-10.0
-1.0
-20.0
-2.0
Contribution to percent
change in real GDP
-30.0
-3.0
-40.0
-4.0
-50.0
-5.0
07:Q4
08:Q2
08:Q4
09:Q2
09:Q4
10:Q2
10:Q4
Source: Bureau of Economic Analysis / Haver Analytics.
In the fourth quarter durable goods orders continued to show year-over-year
improvements, despite falling a bit from the third quarter. Data for the forward-looking
capital goods measure has been stronger than the total measure, suggesting
manufacturing investment will continue to be positive in the coming months.
Durable Goods Orders
Percent Change, year-over-year
Percent Change, year-over-year
40.0
40.0
Percent change, previous quarter
30.0
20.0
10:Q1
10:Q2
10:Q3
10:Q4
Dur.
5.85
2.59
1.99
-1.12
Cap.
3.58
6.95
2.43
2.50
Capital Goods Nondefense,
Excluding Aircraft
30.0
20.0
10.0
10.0
0.0
0.0
-10.0
Durable Goods,
New Orders
-10.0
-20.0
-20.0
-30.0
-30.0
-40.0
-40.0
07:Q4
08:Q2
08:Q4
Source: U.S. Census Bureau / Haver Analytics.
09:Q2
09:Q4
10:Q2
10:Q4
Residential investment has been quite volatile since the end of the recession. The
introduction and expiration of the various tax credits makes it difficult to gauge any
underlying trends in the housing market, but investment did increase a bit in the
fourth quarter without any stimulus support.
Residential Investment
Annualized Percent Change
Annualized Percent Change
30.0
30.0
20.0
20.0
10.0
10.0
0.0
0.0
-10.0
-10.0
-20.0
-20.0
-30.0
-30.0
-40.0
-40.0
07:Q4
08:Q2
08:Q4
09:Q2
09:Q4
10:Q2
10:Q4
Source: U.S. Census Bureau / Haver Analytics.
Home sales rose overall in the fourth quarter (new home sales only slightly), due
primarily to double-digit increases in December. Despite the recent improvements,
sales remain far below their pre-recession levels. The real estate market also
continues to be affected by falling house prices, an issue exacerbated by elevated
inventories of existing homes and foreclosed properties yet to hit the market.
New and Existing Home Sales
Thousands of Units,
Annualized
1500
Thousands of Units,
Annualized
Existing
Home Sales
1250
7500
7000
6500
1000
6000
750
5500
5000
500
New Home Sales
4500
250
4000
0
3500
04:Q4
05:Q4
05:Q2
06:Q4
06:Q2
Source: U.S. Census Bureau / Haver Analytics.
07:Q4
07:Q2
08:Q4
08:Q2
09:Q4
09:Q2
10:Q4
10:Q2
Government spending fell slightly in the fourth quarter, following two quarters of
solid increases.
Government Spending
Annualized Percent Change
Annualized Percent Change
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
-4.0
-4.0
07:Q4
08:Q2
08:Q4
09:Q2
09:Q4
10:Q2
10:Q4
Source: Bureau of Economic Analysis / Haver Analytics.
Imports fell in the fourth quarter for the first time in a year-and-a-half, while exports
accelerated a bit. These changes reversed the recent trend of net exports being a
drag on the economy, contributing 3.4% to GDP in the fourth quarter.
Exports and Imports
Annualized Percent Change
Annualized Percent Change
40.0
40.0
Exports
30.0
30.0
20.0
20.0
10.0
10.0
0.0
0.0
-10.0
-10.0
Imports
-20.0
-20.0
-30.0
-30.0
-40.0
-40.0
07:Q4
08:Q2
08:Q4
Source: Bureau of Economic Analysis / Haver Analytics.
09:Q2
09:Q4
10:Q2
10:Q4
Initial claims for unemployment insurance in January were up from December, due in
part to winter weather-related administrative backlogs. Despite the increase, the
January level was in line with the fourth quarter average.
Initial Claims
Thousands of Units at Annual Rates
Thousands of Units at Annual Rates
700
700
650
650
600
600
550
550
500
500
450
450
400
400
350
350
300
300
250
250
07:Q4
08:Q2
08:Q1
08:Q4
08:Q3
09:Q2
09:Q1
09:Q4
09:Q3
10:Q2
10:Q1
10:Q4
10:Q3
Jan-11
Source: Department of Labor, Employment and Training Administration / Haver Analytics.
Consumer attitudes improved in January from their fourth quarter averages. In
general, consumers felt better about current business and labor market conditions
and were more optimistic about those conditions improving further in the coming
months.
Consumer Sentiment and Expectations
Index, 1966:Q1=100
90
Index, 1966:Q1=100
90
80
80
Sentiment
70
70
60
60
Expectations
50
50
40
40
07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 Jan-11
Consumer Confidence and Expectations
Index, 1985 = 100
100
Index, 1985 = 100
120
120
100
Confidence
80
80
60
60
40
40
20
Expectations
20
0
0
07:Q4 08:Q1 08:Q2 08:Q3 08:Q4 09:Q1 09:Q2 09:Q3 09:Q4 10:Q1 10:Q2 10:Q3 10:Q4 Jan-11
Source: The Conference Board (confidence) and University of Michigan (sentiment) / Haver Analytics.
The ISM indices improved further in January, building on the increases seen in the
fourth quarter. The diffusion index reached its highest point in almost seven years,
while the employment index surged to its best reading since 1973.
ISM Index
Index (50+ = Economic Expansion)
Index (50+ = Economic Expansion)
65.0
65.0
ISM Index
60.0
60.0
55.0
55.0
50.0
50.0
45.0
45.0
40.0
40.0
35.0
35.0
Employment Index
30.0
30.0
25.0
25.0
07:Q4
08:Q2
08:Q1
08:Q4
08:Q3
09:Q2
09:Q1
09:Q4
09:Q3
10:Q2
10:Q1
10:Q4
10:Q3
Jan-11
Source: Institute for Supply Management / Haver Analytics.
Inflation remained subdued in the fourth quarter, as the primary measures showed
little change from the third quarter. The four-quarter change in core CPI was the
lowest in the history of the series.
Consumer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
Consumer Price Index
Consumer Price Index,
excluding food and energy
07:Q4
08:Q2
08:Q4
09:Q2
09:Q4
10:Q2
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
10:Q4
Producer Price Index
Percent Change, Year-Over-Year
Percent Change, Year-Over-Year
12.0
12.0
8.0
Producer Price Index
4.0
8.0
4.0
0.0
0.0
Producer Price Index,
excluding food and energy
-4.0
-4.0
-8.0
-8.0
07:Q4
08:Q2
08:Q4
Source: Bureau of Labor Statistics / Haver Analytics.
09:Q2
09:Q4
10:Q2
10:Q4
Productivity picked up a bit in the fourth quarter, as output increased more than hours
worked. Unit labor costs fell further during the quarter, and compensation growth
slowed.
Productivity and Costs
Percent Change, Previous Quarter
Percent Change, Previous Quarter
12.0
12.0
Compensation
Per Hour
9.0
9.0
Output
Per Hour
6.0
6.0
3.0
3.0
0.0
0.0
-3.0
-3.0
-6.0
-6.0
Unit
Labor Costs
-9.0
07:Q4
08:Q2
08:Q4
09:Q2
09:Q4
-9.0
10:Q4
10:Q2
Source: Bureau of Labor Statistics / Haver Analytics.
In the fourth quarter, total employment costs grew at a slightly faster pace than seen
in the third quarter. Wage and salary growth picked up to offset the third quarter
slow-down, while benefit costs continued to accelerate.
Employment Cost Index
Annualized Percent Change
Annualized Percent Change
5.0
5.0
Total
Compensation
4.0
4.0
Benefit Costs
3.0
3.0
2.0
2.0
1.0
1.0
Wages and Salaries
0.0
0.0
07:Q4
08:Q2
08:Q4
Source: Bureau of Labor Statistics / Haver Analytics.
09:Q2
09:Q4
10:Q2
10:Q4
Oil prices were slightly higher in January than they were in December. Prices spent
a good part of the month above $90 per barrel, leading to the highest monthly
average since September 2008.
Past Five Months
Domestic Spot Oil Price
Dollars per Barrel
Dollars per Barrel
95.0
140.0
130.0
120.0
90.0
110.0
100.0
85.0
90.0
80.0
70.0
80.0
60.0
50.0
75.0
40.0
30.0
70.0
Jan-11
20.0
07:Q4
08:Q3
09:Q2
10:Q1
Sep-10
10:Q4
Nov-10
Source: Wall Street Journal / Haver Analytics.
Overall, data since your last Directors' meeting show the economy accelerated in the
fourth quarter, and is likely to continue to grow at a solid pace through the first half of
this year. While the recovery appears to have become more self-sustaining,
downside risks remain in the forms of housing and employment. Further
improvements in these areas will be necessary before declaring a healthy economy.
Short-Term Interest Rates
Percent
Percent
5.0
5.0
Discount Window Primary Credit
1.50
4.0
Federal Funds Rate
(effective rate)
0.50
0.75
0.61
0.75
0.75
4.0
1.00
0.75
0.50
3.0
3.0
0.00
09:Q4
10:Q1
10:Q2
10:Q3
10:Q4 Jan-11
2.0
2.0
1.0
1.0
0.0
0.0
07:Q4
08:Q2
08:Q1
08:Q4
08:Q3
09:Q2
09:Q1
Source: Federal Reserve Board of Governors / Haver Analytics.
09:Q4
09:Q3
10:Q2
10:Q1
10:Q4
10:Q3
Jan-11
PRESIDENT'S REPORT TO THE BOARD OF DIRECTORS,
FEDERAL RESERVE BANK OF BOSTON
February 10, 2011
Current Economic Developments - Addendum: Data released in the past week
Nonfarm payrolls added only 36,000 jobs in January, far below expectations. But the
unemployment rate fell four-tenths of a percentage point to 9.0%, its lowest level since
April 2009. The report also showed a drop of 500,000 in the labor force, but when
adjusting for new population controls instituted in January, the labor force was
unchanged. In other words, job creation in January was likely more robust than the
headline data would indicate.
While Friday's employment report painted a generally positive picture of labor market
conditions, it was also a confusing one. Some of the data appears contradictory, due
primarily to differences in how the payroll and household survey results are calculated.
The most important difference, especially for January, is how the surveys handle
people being unable to work due to bad weather. Such workers are counted as
employed by the household survey but not included in payroll data.
Through the first week of February, Redbook sales were up 1.7% compared to
January, and up 2.7% compared to the same period last year. Oil prices decreased
a bit over the past week, averaging $88.5 per barrel as opposed to the previous
week's average of $89.8.
Payroll employment posted a small increase in January, and revisions to the prior
two months' estimates resulted in a gain of 40,000 additional jobs. The unemployment
rate fell four-tenths of a percentage point to 9.0%, and the combined eight-tenths
percentage point drop since November is the largest two-month decline since 1958.
Nonfarm Payroll Employment
Unemployment Rate
Change from Previous Quarter, Monthly Average
Rate
300
11.0
200
100
10.0
0
-100
9.0
-200
-300
8.0
-400
-500
Change from Previous Month
-600
Nov-10
Dec-10
Jan-11
Nov-10
Dec-10
Jan-11
-700
93,000
121,000
36,000
9.8
9.4
9.0
7.0
6.0
-800
08:Q4 09:Q2 09:Q4 10:Q2 10:Q4
09:Q1 09:Q3 10:Q1 10:Q3 Jan-11
Source: Bureau of Labor Statistics / Haver Analytics.
08:Q4 09:Q2 09:Q4 10:Q2 10:Q4
09:Q1 09:Q3 10:Q1 10:Q3 Jan-11